CC-7 inaccurate banking explanation

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DrKrbyLuv's picture
DrKrbyLuv
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CC-7 inaccurate banking explanation

CC-7:

We now have a bank with $1000 on deposit, and banks do not make money by holding on to it – rather, they make their living by borrowing at one rate and loaning at a higher rate.

Banks don't borrow the money they lend, they create it for virtually free, and they don't pay interest on it. 

CC-7:

You might also notice here that if everybody who had money at the bank, all $10,000 dollars of them, tried to take their money out at once, that the bank would not be able to pay it out, because, well, they wouldn’t have it. The bank would only have $1000 hanging around in reserve. Period.

I think this statement needs clarified as there are several possible scenarios.  First, if the bank has $10,000 in deposits, then it can all be withdrawn in several formats. 

  • Checks could be written for the full $10,000 and deposited in another bank or spent on purchases.
  • The bank would most likely not have $10,000 cash on hand.  They buy some paper money to handle cash withdrawls but not more than is normally needed since paper money costs around $0.04 per note (regardless of denomination) and account money is virtually free.  So, if everyone tried to withdraw their money, in the form of cash, they would run out of paper notes but not money.

The only way that banks would not have enough money (not just cash) to cover their deposits would be if there was fraud or if the bank was insolvent (or both).  For example, banks are allowed to create money for their own account for investment purposes.  In the past, commercial banks were very conservative in buying bonds and safe securities and investment banks were more speculative.

Clinton pushed legislation that enables banks to act as both investment and commercial institutions.  The result has been that banks are taking more risks in their investments, and if they lose money they may not be able to cover all of their deposits.  The problem is that many banks operate as involvement institutions - they remain in business only if their depositors don't simultaneously withdraw too much.

We can see how much the banks are creating for their own account and the accounts of borrowers in the Federal Reserve H.8 report.  In MONEY & MYTHS by Carmen Pirritano, the ration of loans to investments was 7 to 3, so 30% of the money created by banks in that time frame was 30% - a very significant percentage.

Larry

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Re: CC-7 inaccurate banking explanation

DrKrbyLuv wrote:
  • Checks could be written

Hi Dr,

Just to clarify that, cheques aren't money and you cannot buy products for cheques made out in your own name. If we are imagining a senario where everybody does go and try to get their money I think we can assume that depositing useless cheques in other useless banks is not going to cut it for most folks.

So if everyone went to the bank and demanded their cash, it is true that the banks would not be able to satisfy that demand. The amount of cash in circulation has no real bearing on the the amount of money in the system, it is a tiny fraction of it. But if that system crashes for whatever reason, or electronic money is no longer usable or valued, (due to electronic failure, massive fraud/hacking or whatever)  than it is true that the banks would not have enough money to give out and the central banks would not be able to print fast enough to meet the demand either.

I guess we can imagine a senario where bank-issued credit notes, in lieu of cash, may be used as money by the populace, but that is not the same thing.

I see your points, but I think Chris was trying to keep things simple as it is an introduction to money creation and I think he has the basics down here.

hugs,

Crash x

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Re: CC-7 inaccurate banking explanation

Crash wrote:

Just to clarify that, cheques aren't money and you cannot buy products for cheques made out in your own name. If we are imagining a senario where everybody does go and try to get their money I think we can assume that depositing useless cheques in other useless banks is not going to cut it for most folks.

Thanks for responding to my comments Crash.  Here's a clarification of what I'm saying - if you have an account at a bank that you no trust, you don't have to withdraw cash.  They have a limited amount of cash, much less than their deposits but they may still have all of the depositors money.

So, instead of going to the bank and requesting a cash withdrawal, you could write a check opening an account with another bank.  Or, you could write a check to buy gold or some other asset.  The only reason that the check would not clear would be if the bank was guilty of fraud and or, making bad investments.  If banks have "excessive reserves" they may create money for their own investment accounts.  If those investments go south, the bank could become insolvent - that is that their liabilities may be more than their assets.

Crash wrote:

I see your points, but I think Chris was trying to keep things simple as it is an introduction to money creation and I think he has the basics down here.

Maybe, but I think it is inaccurate to say that banks are borrowing the money they lend and it is inaccurate to say that "bank runs" can happen with a solvent bank - at worst, if the bank is solvent it could suggest that you right a check to withdraw your money.  I think that the reality is that many banks are insolvent - all it takes is a run to find out.

Larry

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Re: CC-7 inaccurate banking explanation

Thanks for bringing this up, Larry. I think you are hitting on a very widespread misconception about fractional reserve banking, upon which I'll elaborate in a moment. First I'll throw in the disclaimer that I don't have professional level knowledge of this stuff, so it could be that I'm the one who is missing something here. But I believe that CC-7 is in fact correct. Your opening statement is what I believe to be a widely held misconception about the creation of money:

DrKrbyLuv wrote:

CC-7:

We now have a bank with $1000 on deposit, and banks do not make money by holding on to it – rather, they make their living by borrowing at one rate and loaning at a higher rate.

Banks don't borrow the money they lend, they create it for virtually free, and they don't pay interest on it. 

No, I don't think that's right. There seems to be a widely held belief that "Commercial banks are licensed by the government to create money out of thin air by lending money they don't have to borrowers." I believe this statement is wrong, and that only the Fed has the ability to create money "out of thin air". Commercial banks are in fact in the business of taking in deposits, then loaning that money back out. The statement "borrowing at one rate..." refers to accepting deposits that must be repaid with interest, but only a very small amount of interest in comparison to prevailing loan rates.

The reason that the commercial banking process can be said to "create money" is that as CC-7 illustrates, when a bank lends out up to 90% of a deposit it takes in, the recipient of that money might deposit it back into the same bank. So in all cases, the commercial bank has to get the money from somewhere (deposits taken in) before it can loan the money out (loans shown as assets on the bank's balance sheet). The phenomenon of "money creation" in commercial banking happens because in effect, the same money gets counted twice (or more) as deposits. But commerical banks can't just print money and loan it out. The only money they can loan out is money they first borrowed themselves, or took in as deposits. The point is that because they are allowed to loan out up to 90% of the money they take in, and some of the money they loan out will subsequently be taken in again as new deposits, at the end of the day the total amount of deposits on record exceeds the amount of money that originally started the loan-redeposit-loan-again cycle depicted in CC-7.

The widespread propaganda in recent Internet videos has been "The government allows banks to loan out money they do not have". Again, I believe this to be factually inaccurate. Banks (with the BIG exception of the Fed itself) are only allowed to loan out money they do have. It is the process of loaned-out money being re-counted as a new deposit that causes "money creation" to occur in commercial banking. So in reality, it is true that banks' business is limited to borrowing on the cheap (taking deposits at low interest rates) and lending that same money back out at higher interest rates to earn a profit. No money is "created out of thin air" at commercial banks. But the same money that was lent out yesterday (and which the bank is still being paid interest for) may be taken in tomorrow as a deposit, enabling another loan to be made.

I'd love it if CM or someone with professional knowledge of this subject could validate what I just said. I am pretty sure it is correct but would very much appreciate an expert ratification...

Erik

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Re: CC-7 inaccurate banking explanation

ErikTownsend wrote:

"The government allows banks to loan out money they do not have". Again, I believe this to be factually inaccurate. Banks (with the BIG exception of the Fed itself) are only allowed to loan out money they do have.

I'd love it if CM or someone with professional knowledge of this subject could validate what I just said. I am pretty sure it is correct but would very much appreciate an expert ratification...

Erik

Welllllll......   Of late the US govt sort of has been letting banks lend money they don't have,,,,,,,

Any insolvent bank is essentially doing that, but the FDIC is looking the other way ( read Kal denninger's comments on this )

But in normal terms you have it bang on.

Cheers Hamish

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Re: CC-7 inaccurate banking explanation

Erik wrote:

There seems to be a widely held belief that "Commercial banks are licensed by the government to create money out of thin air by lending money they don't have to borrowers." I believe this statement is wrong, and that only the Fed has the ability to create money "out of thin air". Commercial banks are in fact in the business of taking in deposits, then loaning that money back out.

...would very much appreciate an expert ratification...

Hello Erik,

I'm not an "expert" but I can list some quotes that may be helpful.  Banks sometimes imply that the system works as you suggested which causes confusion.  Hopefully these quotes will help:

  • "The actual creation of money always involves the extension of credit by private commercial banks”  - Russell L. Munk, Assistant General Counsel, Department of the Treasury
  • You may want to know whether the bank is the one getting the benefit of the new money, since the bank owns the new money while the customer has merely borrowed the money. The bank does indeed get the benefit of the new money (interest or the collateral).  - Russell L. Munk, Assistant General Counsel, Department of the Treasury
  • “Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid.”  - John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service, Report No. 83-125 E
  • “If all the bank loans were paid no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought.  We are completely dependent on the commercial banks.  Someone has to borrow every dollar we have in circulation, cash or credit.  If the banks create ample synthetic money we are prosperous; if not, we starve.  We are absolutely without a permanent money system.  When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.  It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."   - Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta

"The Story of Banks" (by the Federal Reserve)

 

If banks actually loaned their deposits, the depositors could not withdraw all of their money.  For example, if you had $1,000 in your account, and the bank loaned $500 of it, you could only withdraw or write a check for $500.  So, if they don't lend out depositors money, you would think it should always be there. 

Banks sometimes borrow "high-powered" money from the Federal Reserve so that they can build their reserves.  If a bank has "excess" reserves (more than required) then they are allowed to create money for their own account to fund investments.  If the investments go bad, the bank may not have enough to cover all the accounts. 

Larry

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Re: CC-7 inaccurate banking explanation

Hi Larry,

Again, I do not profess to be the a guru on this, but what I can say with certainty is that your understanding and mine are quite different. At least one and maybe both of us are wrong.

Regarding the various quotations you provided, yes, I agree with those statements. But the point is that the reason making loans "creates money" is that the bank still has the deposit on the books, then when it loans the deposited funds out to a borrower, that borrower has money and the original depositor has money. So since two guys now have money where only one did before, money has been "created". But that is not the same as to say that banks are licensed to "print money" or "create money from thin air". I stand by my opinion (which may be proven wrong; we'll see) that only the Fed can create money out of thin air. Commercial banks "create money" by taking in deposits then loaning up to 90% of those deposits back out.

Larry wrote:

If banks actually loaned their deposits, the depositors could not withdraw all of their money.  For example, if you had $1,000 in your account, and the bank loaned $500 of it, you could only withdraw or write a check for $500.  So, if they don't lend out depositors money, you would think it should always be there.

YES! That's the whole point of why FRB is such a Scam. When I deposit $1000, the bank DOES lend much of it out to someone else. The only reason I can withdraw the $1000 is that not all the depositors want to withdraw at the same time. But if they ever did (a bank run), the bank would be unable to make good on the deposits.

Larry wrote:

Banks sometimes borrow "high-powered" money from the Federal Reserve so that they can build their reserves.  If a bank has "excess" reserves (more than required) then they are allowed to create money for their own account to fund investments.  If the investments go bad, the bank may not have enough to cover all the accounts.

I don't think this statement is correct either. The mechanism I believe you are referring to is the discount window. It is true that banks can borrow (not create) money from the Fed thru the discount window. They have to pay it back, but they are allowed to get away with borrowing the money at low (or no) interest, reinvesting the money to produce a positive return, then repaying the borrowed principal and keeping the investment profits. This is the mechanism through which the Fed is presently "giving away free taxpayer money to wall street banks".

I stand by my earlier opinion: Commercial banks cannot create or print money under any circumstance. All they can do is take in deposits or borrow funds through loans, then loan that same money out at higher rates to other borrowers. The "money creation" aspect of this occurs because the depositor still has the "money" in his deposit account, while the borrower has been given that same money which now counts as new money.

I hope CM will chime in with some guidance here. I am pretty sure that you have a slight misunderstanding, Larry, about how this works. But I've been proven wrong before so this might be another case where I'm the one who is missing the point. Thanks again for bringing up the discussion either way!

Erik

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Re: CC-7 inaccurate banking explanation

Hi Erik,

Interesting stuff, I'm learning a lot from our discussion.  To be sure, this topic can be a bit tedious as the system is neither straight forward nor logical in my opinion.  Since I initiated the objection, the onus should be on me to substantiate my claim.  I'll try to clarify my understanding.  We seem to agree on much but as usual, the devil is in the details.

In most of my points/counterpoints I will be using "Modern Money Mechanics" (MMM) issued by the Federal Reserve Bank of Chicago (no longer in print). 

Erik wrote:

I stand by my opinion (which may be proven wrong; we'll see) that only the Fed can create money out of thin air. Commercial banks "create money" by taking in deposits then loaning up to 90% of those deposits back out.

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."  - MMM pages 6-7

"The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers' accounts."  - MMM page 3

If banks operated as you described, then the sole determination of how much new money they could create would be dictated by "demand deposits" (checkbook money).  If a bank had $100,000,000 in deposits, I think you are saying that they would have the potential to loan (create) $90,000,000 while keeping $10,000,000 in a special account (assuming a 10% reserve ratio).

Under your scenario, if a bank's deposits were reduced by 50%, the bank's ability to create new money would also be reduced by the same percentage.  This may or may not be true depending on the amount of reserves held by the bank.

My take is that the bank's "reserves" are the key variable in determining how much new money they may create.  A concern is that depositors may want to withdraw from their checkbook account by taking cash, so a minimum amount of cash must be kept to service bank customers.

What are bank reserves?  

Reserves are defined as "Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) at the Federal Reserve Banks. Both are equally acceptable in satisfaction of reserve requirements. A bank can always obtain reserve balances by sending currency to its Reserve Bank and can obtain currency by drawing on its reserve balance. Because either can be used to support a much larger volume of deposit liabilities of banks, currency in circulation and reserve balances together are often referred to as "high-powered money" or the "monetary base." Reserve balances and vault cash in banks, however, are not counted as part of the money stock held by the public."  - MMM page 4

Where do reserves come from?

"From the standpoint of money creation, however, the essential point is that the reserves of banks are, for the most part, liabilities of the Federal Reserve Banks, and net changes in them are largely determined by actions of the Federal Reserve System...Except for reserves borrowed temporarily from the Federal Reserve's discount window, as is shown later, the supply of reserves in the banking system is controlled by the Federal Reserve...a given increase in bank reserves is not necessarily accompanied by an expansion in money."  - MMM page 5 

This is where things get dicey.  Most of the bank reserves are actually liabilities of the Federal Reserve.  Would it be correct to say that only the reserves accessed through the "discount window" are actually borrowed - the rest is free?  An important note here is that if the Fed lends, it lends reserves. 

What amount of reserves are required and what may banks do with the excess?

"Although reserve accounts are used as working balances, each bank must maintain, on the average for the relevant reserve maintenance period, reserve balances at their Reserve Bank and vault cash which together are equal to its required reserves, as determined by the amount of its deposits in the reserve computation period."  - MMM page 4 

Can these accounts be used to pay bank expenses, for example supplies, real estate taxes, employee salaries, interest for savings and CD accounts?  I suspect so.

"Reserves in excess of this amount may be used to increase earning assets - loans and investments. Unused or excess reserves earn no interest."  - MMM page 6  

Apparently, banks can use their excess reserves (and "discount window") to "create" money for their own investment accounts.  I think we are seeing this now.  The paradigm shift may be that instead of using the FOMC to keep the money supply stable; the tail is wagging the dog in that government securities must be bought as the Fed acts as the buyer of last resort.  The consequence is that bank reserves are building faster than borrowing demand which may creating a huge bubble.

I hope I haven't pushed away from the original discussion.  Look forward to your or any other comments.

Larry

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Re: CC-7 inaccurate banking explanation

ErikTownsend wrote:

Hi Larry,

Again, I do not profess to be the a guru on this, but what I can say with certainty is that your understanding and mine are quite different. At least one and maybe both of us are wrong.

Regarding the various quotations you provided, yes, I agree with those statements. But the point is that the reason making loans "creates money" is that the bank still has the deposit on the books, then when it loans the deposited funds out to a borrower, that borrower has money and the original depositor has money. So since two guys now have money where only one did before, money has been "created". But that is not the same as to say that banks are licensed to "print money" or "create money from thin air". I stand by my opinion (which may be proven wrong; we'll see) that only the Fed can create money out of thin air. Commercial banks "create money" by taking in deposits then loaning up to 90% of those deposits back out.

Hi Eric

I think maybe I can help resolve this impasse. Then again, I too am a layman, so maybe all three of us can be wrong! But actually, I think you're BOTH right. Your analysis seems perfectly sound to me. But I don't think this precludes Larry's conclusions from being basically sound too, if perhaps a little fuzzy in a detail or two. Because in my view, you're talking about two different things. You seem to be describing the detail of the process - the micro picture, while Larry is describing the result - the macro picture. Or maybe what it really comes down to is, you're talking strictly about a given fractional reserve transaction - quite accurately, I might add, while Larry is  talking about the money multiplier - what happens when many fractional reserve transactions multiply - a very different story. 

As I see it, looking at a fractional reserve transaction with just one depositor and just one borrower, in just one bank is a little like viewing a game of musical chairs in which the music is just beginning. Later on it gets a lot more interesting!  If we look at the banking system as one bank - which in a way it is - then suddenly instead of the bank lending 90% of the money it "has," from actual deposits, now, with recycling - 90% of  900, 90% of 810, of  729, etc. -  it is lending 900%! (the multiplier being the inverse of the fractional reserve ratio) So while the banks may not be able to "print money," no one is distinguishing bank credit (or checkbook money) from Federal Reserve Notes. And as I understand it about 95% of all money is created this way. So while I compliment you for your excellent description of the process, I'm perfectly comfortable saying they do indeed conjure money "out of thin air!" 

What a racket!

Cheers

Greg 

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Re: CC-7 inaccurate banking explanation

Greg,

I appreciate your perspective, but I do think there is a specific misconception that is widely held, and that is affecting Larry's viewpoint. I'll try to be more specific in narrowing down what I believe to be the "rub" here.

When a commercial bank loans money to someone, money is being created. We all seem to agree on that. But the specific misconception I'm talking about is that a lot of people seem to believe that banks are somehow licensed or authorized to loan out money they do not actually have, i.e. creating it out of thin air. My contention is that this is a mistaken belief. To my knowledge, banks like any other entity can't loan or do anything with money unless they get it from someone or someplace first.

I contend that in order for a bank to loan out money, they must first take in that money, specifically in the form of deposits or borrowings from other lenders. Once they have money from one of these sources, they can loan it out to someone else. But they can not just "print more and lend it out".

The phenomenon of money creation as a result of bank lending occurs when deposits are lent out. If I deposit $1000 to Larry National Bank, then I have $1000 of "money" in the bank. If the bank then lends $900 of it to Greg, then Greg has $900 and I still have my $1000 in the form of a bank deposit, so in effect $900 of "new money" has been created. But it wasn't created out of thin air nor was the bank authorized or licensed by the government to print it. The bank is allowed to accept my deposit (that's money) and loan it out to someone who deposits it back into the bank, exactly as CC-7 illustrates. In effect the deposits are double-counted - My deposit and Greg's deposit are both part of the Money Supply.

A lot of people seem to believe that if I deposit $1000 in the bank, that the bank is somehow magically authorized to create another $9000 of new money out of thin air, then lend out $10,000. This is a complete misinterpretation of fractional reserve banking. In reality, when I deposit the first $1000, the bank is only allowed to loan out 90% of it, or $900. The bank cannot and does not create $9000 new dollars at that point. The way that it can eventually mushroom into $9000 of total money is after several iterations of the cycle depicted in CC-7.

Erik

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Re: CC-7 inaccurate banking explanation

Erik,

you have it right.  We need to distinguish between "money" and "credit". 

Commercial banks are in the business of extending credit.  To do this they begin with a pool of capital put in by investors that is pretty tightly regulated in terms of its ratio to loans.  But the capital is neither here nor there in this little story, I just want to be sure we understand the three big pieces of a bank balance sheet.

The other two items are liabilities and assets.  In banking parlance their liabilities are your deposits and their assets are your debts (or loans).

The way the system is currently configured banks can take in a deposit and loan out up to 90% of that amount.  So my statement stands - banks make money by borrowing at one rate (whatever they pay you for your deposit account) and lending out at a higher rate (the interest rate on the loans they make).

The cycle of deposits-->loans-->deposits-->loans-->etc.  is the credit-money system and it works a little bit differently from high-powered or "thin-air" money because credit-money must be paid back whereas thin-air money is forever (at least it has been since 1913 without exception). 

The whole story gets confusing because credit acts like money and, to the person who was paid with borrowed money, it doesn't feel like credit money - it feels like money!

It's worth wrestling with the distinction however because understanding how the system operates provides clues as to "what's coming next."  For example, the Fed has recently bought a trillion and half of debt ("assets") off the books of the banks and GSEs and used thin-air money to accomplish the task.  If the Fed cannot reel that money back in - say, because the institutions they acquired them from are essentially cash-poor and insolvent - then it represents the conversion of a vast pool of credit money into high-powered money. 

This will have enormous implications for inflation and liquidity - themes I have been harping on for sometime and which are rooted in my belief that the Fed will find itself unable to withdraw all that funny-money in time (if ever!) to prevent another crack-up boom.

The important distinction is this - credit money must be repaid on a schedule, but thin-air money is effectively forever.

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Re: CC-7 inaccurate banking explanation

Hello Chris and Greg,

Welcome to the discussion.  If I disagree with someone very sharp, it causes me to pause and wonder if I'm wrong or maybe doing a poor job of explaining myself - I consider you all to be damned sharp.  I don't mean to be obstinate in taking a counter position and I sure don't want to imply that I am a monetary expert, though I am trying to gain some expertise in this area. 

I'll try to clarify my difference of opinion and would greatly appreciate if anyone would be kind enough to cite a source or some facts that counter or clarify my understanding. 

Greg wrote:

I think maybe I can help resolve this impasse. Then again, I too am a layman, so maybe all three of us can be wrong! But actually, I think you're BOTH right. Your analysis seems perfectly sound to me. But I don't think this precludes Larry's conclusions from being basically sound too, if perhaps a little fuzzy in a detail or two. Because in my view, you're talking about two different things.

I think you may be right, we seem to disagree as to what bank reserves entail.  My take is that banks must keep some cash on hand (in their vault) in order to service their accounts.  Demand deposits are not used for this purpose.  In addition, banks hold some reserves in their Federal Reserve district bank.  Again, demand deposits are not included in their reserves.

Most of the money held in their Federal Reserve account has been created as a liability to the Fed - essentially free money.  An exception is that banks may borrow from the Fed through the "discount window" to build their reserves if needed.  If a bank has an inadequate amount of reserves, it can not lend any money regardless of how much they have on deposit.  When the Fed lends to the banks, it is lending reserves, not money for loans.

This is how the Fed "controls" the money supply.  They buy and sell bonds and treasury bills which increases or decreases the reserves, thus more or less money may be created by the collective banks.  If a bank has excessive reserves (more than is required to make loans) they are free to create money for their own account and to invest it for their own benefit.

Erik wrote:

When a commercial bank loans money to someone, money is being created. We all seem to agree on that. But the specific misconception I'm talking about is that a lot of people seem to believe that banks are somehow licensed or authorized to loan out money they do not actually have, i.e. creating it out of thin air. My contention is that this is a mistaken belief. To my knowledge, banks like any other entity can't loan or do anything with money unless they get it from someone or someplace first.

I think that banks hold a monopoly to create new money and the money they create is indeed created on the spot, virtually for free.  It does not exist until someone puts up some collateral and signs a promissory note to repay.

To my knowledge, there are three entities that may create new money; the Federal Reserve, banks and the U.S. Treasury.  The Treasury hasn't created any money, other than coins, for quite some time and in practice, banks create most of our new money (around 97% I think).

I agree and don't like the term "created out of thin air" because the borrowers collateral and promise to pay endows the money with value.  It may be free for the bank to create money but the borrower is on the hook with skin in the game.  But from the bank's perspective, it is out of thin air.

Chris wrote:

Commercial banks are in the business of extending credit.  To do this they begin with a pool of capital put in by investors that is pretty tightly regulated in terms of its ratio to loans.

Granted, the banks must have some money before making any loans.  For example, they need to have some cash in their vault but I don't think any investor money is used or needed in making actual loans.  Indirectly, yes, but not directly.

Chris wrote:

The way the system is currently configured banks can take in a deposit and loan out up to 90% of that amount.  So my statement stands - banks make money by borrowing at one rate (whatever they pay you for your deposit account) and lending out at a higher rate (the interest rate on the loans they make).

Here is where I think there is a subtle but important distinction.  As mentioned before, I don't think banks can lend UNLESS they have enough in reserves.  Reserves are cash in vault and money held in the banks Federal Reserve account.  Their deposits are not part of the qualifying process; I don't think they are allowed to lend demand deposit money or to hold any demand deposit money as part of their reserves. 

So, what is the significance of the "money multiplier" (sometimes inaccurately called a reserve ratio) if not to establish if a bank can create new money through loans?  If the reserve requirements are met, then the banking community may expand any new loan by the money multiplier. 

Chris wrote:

For example, the Fed has recently bought a trillion and half of debt ("assets") off the books of the banks and GSEs and used thin-air money to accomplish the task.  If the Fed cannot reel that money back in - say, because the institutions they acquired them from are essentially cash-poor and insolvent - then it represents the conversion of a vast pool of credit money into high-powered money. 

Different topic, but very interesting.  If the transactions are off the books, then would I be correct in saying that it cannot be used as Fed reserves or high powered money?  I think the Fed is going way beyond their charter in doing what you describe, aren't they really buying assets for free?

Chris wrote:

This will have enormous implications for inflation and liquidity - themes I have been harping on for sometime and which are rooted in my belief that the Fed will find itself unable to withdraw all that funny-money in time (if ever!) to prevent another crack-up boom.

This is the part that really aggravates me.  Perhaps the biggest decision in our countries history (when to cut back on pouring money into the system) is being made by a small group of private bankers, behind closed doors.  By relinquishing this vital decision, we are setting up a mega conflict of interest.  And, we have essentially given away our financial sovereignty to the very crooks who ran the truck into the ditch.

Thanks for the great discussion guys!

Larry

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Re: CC-7 inaccurate banking explanation

Hi Larry,

Thanks for starting this thread. I have a philosophy about knowledge: Weak Knowledge is what you are pretty sure you know because you learned it someplace and have no reason to doubt it. Strong knowledge is what you learned, were challenged on, and had to defend in a polite intellectual discourse. The point being that I'm pretty sure I already knew the answers to this before we started, but I know that by the time we're done my grasp of these concepts will be much stronger. I very much appreciate your tenacity in pushing this mini-debate. I am being forced to really test my own comprehension of this stuff, and I really enjoy it.

Ok, with that disclaimer firmly in place, let's move on to why I'm right and you're wrong about everything! Tongue out

I started to reply tit-for-tat to your numerous points, but then realized that the core issue here is that I don't think you have an accurate understanding of the concept of reserves in fractional reserve banking. Let's try to simplify this a little...

What Fractional Reserve Banking means is that banks take in deposits, which they are obliged to eventually pay back to the depositor. To allow the banks to be profitable, they are allowed to loan the deposited money out to borrowers. But if they lent it all out, they would have no money left to pay any withdrawal requests from depositors. So they are permitted to loan some but not all of the deposited funds out to borrowers. The portion of deposited funds that banks keep on hand to cover withdrawals is called the Reserve Ratio. A reasonable, sensible assumption would be that banks would have to maintain very comfortable reserve ratios of, say, 80% or so in order to assure that they could always handle a rash of withdrawal requests. But sensible as that assumption might be, it's wrong. In the United States, the reserve ratio is only 10%, meaning that 90% of funds taken in as withdrawals are lent back out as loans, and at any given time the bank only has 10% of the deposited money on hand to cover witdrawals by depositors. This means that the bank is taking a big gamble: They assume that in the worst case, only 10% of their depositors would ever show up on the same day and want their money back. If 11% show up, the bank can't deliver. Prior to the great depression, this would mean the bank would fail if 11% showed up, and the other 89% would loose everything. Post-depression, the federal government "back stops" this risk, by guaranteeing all deposits through the FDIC. Of course the FDIC doesn't have anywhere close to enough money to cover the withdrawals if all the depositors to all the banks wanted their money back, but since they are a Government institution and have a big building in Washington DC with stone pillars out front, nobody worries about that scenario.

The discount window provides a short-term facility for commercial banks to tap credit from the government if necessary to deal with short-term cashflow anomalies. But the mechanism is one of borrowing money that has to be paid back. There is no creation of money or printing of money by commercial banks.

There is one and only one way that commercial banks participate in the phenomenon of "money creation", and that is lending someone else's money to a borrower while still counting the orignal deposit as "money". This is the one and only way that commercial banks create money.

So again, if I deposit $1000 into Martenson National Bank (MNB), that's $1000 of money. MNB cannot just loan money out of thin air to Larry. If Larry wants a loan from MNB, they have to get it from someplace. But they are allowed to loan out 90% of my (and other depositors) funds. So MNB makes a loan to Larry for $900, using money they got from me. That's the miracle of money creation. I still have my whole $1000. It shows up as a bank deposit. But now Larry has $900 he borrowed, which is actually the same money I deposited. What banks are "licened to do" is to keep on counting deposits as money, even though the money taken in was lent back out to someone else.

The only reason the scam works is that if you aggregate enough depositors, they won't all want their money back at the same instant. The reason they never ask for it back is they can sleep at night with reassurance, because a Federal Institution (FDIC) is "backing" the deposits. The fact that FDIC has something like 2% of the money necessary to cover all the deposits doesn't matter, because they have stone pillars and a very impressive building in Washington, DC.

Erik

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Re: CC-7 inaccurate banking explanation

And if I'm not mistaken, the promissory note of $900 from Larry goes in the asset column of the MNB's GL and they can then loan 90% of Larry's (oops, ERIK's) $900 to Tom, Dick and Harry whose promissory notes are also counted as assets and 90% loaned out............

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Re: CC-7 inaccurate banking explanation

ErikTownSend,

Where are you getting your information about how our banking system works?

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Re: CC-7 inaccurate banking explanation

Tycer wrote:

And if I'm not mistaken, the promissory note of $900 from Larry goes in the asset column of the MNB's GL and they can then loan 90% of Larry's (oops, ERIK's) $900 to Tom, Dick and Harry whose promissory notes are also counted as assets and 90% loaned out............

Welcome to the discussion Tycer, I agree with what you said, with one important caveat.  I'll get into this in my response to Erik, listed below...  Cool

Thomas wrote:

Where are you getting your information about how our banking system works?

Hi Thomas, I'm not surprised that you found your way to our discussion about monetary policy.  I think you hit upon a problem, there really aren't many good sources for accurate information on this topic.  For example, in an earlier post, I frequently quoted "Modern Money Mechanics", published by the Federal Reserve bank of Chicago.  I think the document was published in 1998 and is no longer in print, so I can't say with any certainty that the banking laws and procedures haven't changed since then (for example TARP).

This is the most recent publication on money mechanics, published by the Fed, that I've found, any other links or references would be would be greatly appreceated.

Erik wrote:

Thanks for starting this thread. I have a philosophy about knowledge: Weak Knowledge is what you are pretty sure you know because you learned it someplace and have no reason to doubt it. Strong knowledge is what you learned, were challenged on, and had to defend in a polite intellectual discourse.

Hi Erik,

Yup, you're right, and I'm glad to have this collective opportunity to refine and add to our knowledge.  I'd like to go back to my 2 basic points/objections to CC-7 to try and build some consensus or lay bare our differences. 

Objection #1) -   CC-7 explanation:

"We now have a bank with $1000 on deposit, and banks do not make money by holding on to it – rather, they make their living by borrowing at one rate and loaning at a higher rate."

My original comment was "Banks don't borrow the money they lend, they create it for virtually free, and they don't pay any interest on it."  As far as I can tell, this is an accurate statement.  They create money on the spot, that did not exist before someone borrows it by signiing a promisary note and pledging some collateral.  The banks hold a monopoly that allows them to "monetize" the debt.

This defies one's sensibilities as the system is obviously unfair.  The bank accrues the benefits of money they never had by charging interest and if that's not paid, they take the collateral - all for free.  They don't lend any of their demand deposits and they don't place any of their demand deposits in a special reserve account.  Here are some sources:

  • “Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid.”  - John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service, Report No. 83-125 E
  • "Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."  - Modern Money Mechanics, issued by the Chicago Federal Reserve pages 6-7
  • "33. Do private banks issue money today?  Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities.  The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they “create” it."  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman
  • You may want to know whether the bank is the one getting the benefit of the new money, since the bank owns the new money while the customer has merely borrowed the money. The bank does indeed get the benefit of the new money (interest or the collateral).  - Russell L. Munk, Assistant General Counsel, Department of the Treasury

Objection #2) -   CC-7 explanation:

"You might also notice here that if everybody who had money at the bank, all $10,000 dollars of them, tried to take their money out at once, that the bank would not be able to pay it out, because, well, they wouldn’t have it. The bank would only have $1000 hanging around in reserve. Period."

This is where it gets very confusing and earlier I botched up my explanation of what exactly "reserves" are and are not.  It is true that banks hold some reserves but mostly they are held at their local Federal Reserve branch.  The important thing to note is that the reserves do not include any of their depositors money.

  • "44. What are reserves in modern American banking?  Reserves in modern American banks are deposits—demand deposits—held by commercial banks at the Federal Reserve"  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "45. Where did the commercial banks obtain their reserves?  By and large the bulk of commercial bank reserves were created by the Federal Reserve and credited to the account of the various commercial banks which are Federal Reserve “member” banks. The Federal Reserve creates these reserves just as a bank creates checkbook money. By various devices, either loans or other means, the Federal Reserve credits a bank with bankers deposits—“reserves.”  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "46. Who determines how much checkbook money a bank can create on the basis of its reserves?  The Federal Reserve System sets reserve requirements; that is, the ratio of reserves to deposits that the individual member banks must maintain. This in turn determines how many loans a bank can make, and how many securities it can buy."  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "47. Where does the Federal Reserve get the money with which to create bank reserves?  It doesn’t “get” the money, it creates it. When the Federal Reserve writes a check, it is creating money. This can result in an increase in bank reserves—a demand deposit—or in cash; if the customer prefers cash he can demand Federal Reserve notes, and the Federal Reserve will have the Treasury Department print them. The Federal Reserve is a total moneymaking machine. It can issue money or checks. And it never has a problem of making its checks good because it can obtain the $5 and $10 bills necessary to cover its check simply by asking the Treasury Department’s Bureau of Engraving to print them.  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "50. What is the formula that determines the maximum amount of money available to business and consumers?  Expressed mathematically this is a simple formula A x B = C where: A = Amount of bank reserves; B = Number of dollar deposits member banks may create per each dollar of reserves; and C = Total bank deposits."  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "53. As bank reserves rise do private banks “deposit” their reserves with the Federal Reserve?  Collectively, private banks do not deposit a penny of their own funds, or their depositors’ funds with Federal Reserve banks. Reserves are transferred from bank to bank, but nothing the banks can do will increase the total amount of reserves in the system. Practically, only the Federal Reserve System itself can do this or to permit it to occur from a gold inflow. Increasing or decreasing reserves is a conscious act of the managers of the Federal Reserve.  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.
  • "54. How does the Federal Reserve create and destroy bank reserves?  By four methods: (1) by open market operations; (2) by gold purchases for the U.S. Treasury; (3) by loans to commercial banks; and (4) by purchases of eligible paper from member banks."  - Subcommittee on Domestic Finance of the Banking and Currency Committee, Wright Patman.

So, if the above bullets are correct, how could a bank run occur since the banks deposits are not used in building reserves?  I think what actually occurs is one of two things.  First, if an unusually large percentage of people suddenly showed up demanding cash from their checking accounts (demand deposits), the bank could run out of cash.  In this instance, people could still write a check to buy assets or to open an account at another bank.

Second, the bank may be guilty of fraud and/or may be insolvent.  If they are insolvent, their liabilities (deposits are part of their liabilities) would exceed their liabilities and they would essentially be defaulting.  I don't know if the Federal Reserve collects money owed by the banks to their reserve account before depositors get their money.

No doubt, this is very confusing and in my research I have had a hard time finding timely and official explanations.  I think this is a solid opportunity for CC-7 to expand our understanding of the money system. 

I think this tedious topic is extremely important as evidenced by these quotes:

  1. It [money creation] is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."   - Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta
  2. "Whoever controls the volume of money in any country is absolute master of all industry and commerce."  - President James Garfield
  3. "Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits."  - Sir Josiah Stamp, President of the Bank of England in the 1920's, the second richest man in Britain
  4. "Those few who can understand the system (check book money and credit) will either be so interested in its profits, or so dependent on it favors, that there will be little opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear it burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests."  - Rothschild Brothers of London
  5. "Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal -- that there is no human relation between master and slave."  - Leon Tolstoy
  6. "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it."  - John Kenneth Galbraith

Look forward to any comments.

Larry

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Re: CC-7 inaccurate banking explanation

DrKrbyLuv wrote:

My original comment was "Banks don't borrow the money they lend, they create it for virtually free, and they don't pay any interest on it."  As far as I can tell, this is an accurate statement. 

Larry

The FED ( and other central banks ) can create money with no limit out of thin air, so true for them...................

But lets talk about all the other banks.................

Lets look at an example. You and I start a bank. We put a total of $1000 cash into it ( and all transactions are done in cash ). Our bank can then lend $900 out ( at say 10% ) so we have an net income of $90/year. If we then went and borrowed $10,000 from a few people we know at 2% and lend $9000 of it out, we now have $990 income and have to pay out $200 in interest to our friends. A profit of $790 !!!! hey.... the more we can borrow and lend, the more money we make. So we want to lend LOTS more, how about we lend out $1000,000. ah....dang we don't have $1000,000,. oh well, we can borrow it of those people over there but they want 4%. Well better than nothing.....P.S. How do you put paragraph breaks in now ??????? "enter" key shows up in the work area but not in the preview pane or post. Cheers Hamish

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Re: CC-7 inaccurate banking explanation

You are correct Larry. The caveat being that MNB created the $900 loan they made you from an entry in the GL at the same time you signed the promissory note. 

The $900 did not exist until you signed the promissory note.

$900 of new checkbook money. Poof. Out of thin air.

Sounds crazy. It's impossible. No freakin way.

I mean, the whole world has to be blindfolded for this to have happened.

It's impossible. No freakin way.

or is it.......

From Ellen Brown:

Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the entire $14,000.00 in money and credit upon its own books by bookkeeping entry. That this was the consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created itMr. Morgan admitted that no United States Law or Statute existed which gave him the right to do this.

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Re: CC-7 inaccurate banking explanation

Hmm. I think if banks did create money out of thin air, they would not be that worried about whether the people they lent it to had a way of repaying it. Wait! Isn't that what has been happening for the last ten years or so?

Maybe Chris is right after all.

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Re: CC-7 inaccurate banking explanation

Larry,

I'll add my thanks for starting this thread.  A friend and I had this conversation a few months ago and I've been wondering about it ever since. 

That being said, I'm still confused.  I believe what Chris is saying is that a deposit of $1,000 is made to a bank.  That bank can then loan out $900.  The creation of money comes from the multiplier effect of that money then being deposited into a bank that then loans out $810, etc.  After two generations a $1,000 dollar deposit now becomes $1,710 of real money that the lendees can take out and spend on goods and services.  At least that's what makes sense to my linear brain.  For a while I thought it worked as Larry suggested (I think) that the original bank got the $1,000 and could then loan out $10,000.

I gotta go now, but will check back in later.

Doug

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Re: CC-7 inaccurate banking explanation

Doug wrote:

Larry,

I'll add my thanks for starting this thread.  A friend and I had this conversation a few months ago and I've been wondering about it ever since. 

That being said, I'm still confused.  I believe what Chris is saying is that a deposit of $1,000 is made to a bank.  That bank can then loan out $900.  The creation of money comes from the multiplier effect of that money then being deposited into a bank that then loans out $810, etc.  After two generations a $1,000 dollar deposit now becomes $1,710 of real money that the lendees can take out and spend on goods and services.  At least that's what makes sense to my linear brain.  For a while I thought it worked as Larry suggested (I think) that the original bank got the $1,000 and could then loan out $10,000.

I gotta go now, but will check back in later.

Doug

In just a fractional reserve system that is how it works.

We have a Frankenstein system pieced together that looks something like a fractional reserve system but in reality is not. It's oligarchy.

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Re: CC-7 inaccurate banking explanation

ErikTownsend wrote:

...  I have a philosophy about knowledge: Weak Knowledge is what you are pretty sure you know because you learned it someplace and have no reason to doubt it. Strong knowledge is what you learned, were challenged on, and had to defend in a polite intellectual discourse. The point being that I'm pretty sure I already knew the answers to this before we started, but I know that by the time we're done my grasp of these concepts will be much stronger. I very much appreciate your tenacity in pushing this mini-debate. I am being forced to really test my own comprehension of this stuff, and I really enjoy it.

Eric

Im not sure I much like this philosophy of yours. Because an honest assessment reveals that WAY too much of my knowledge is weak!  - so I'm not sure how valuable my opinion is  - but for what it's worth, I've enjoyed your excellent posts on this topic. Perhaps as you say, you're not a professional, but you seem to be a worthy disciple, never the less. Speaking of which - thanks for flushing out Chris. I found his post to be extremely helpful. Some stuff I've heard and understood (or thought I did) many times before, suddenly became crystal clear.

cmartenson wrote:

The important distinction is this - credit money must be repaid on a schedule, but thin-air money is effectively forever.

The great irony here is that fractional reserve lending, which under the old commodity (gold, gold/silver) based money system has it's roots in fraud, is now essentially the honest part of the process! You guys are absolutely right, the Fed fiat money is the real 'thin-air' money. At least the credit money is based on something.

DrKrbyLuv wrote:

... I'd like to go back to my 2 basic points/objections to CC-7 to try and build some consensus or lay bare our differences. 

Objection #1) -   CC-7 explanation:

"We now have a bank with $1000 on deposit, and banks do not make money by holding on to it – rather, they make their living by borrowing at one rate and loaning at a higher rate."

My original comment was "Banks don't borrow the money they lend, they create it for virtually free, and they don't pay any interest on it."  As far as I can tell, this is an accurate statement.  They create money on the spot, that did not exist before someone borrows it by signiing a promisary note and pledging some collateral.  The banks hold a monopoly that allows them to "monetize" the debt.

This defies one's sensibilities as the system is obviously unfair.  The bank accrues the benefits of money they never had by charging interest and if that's not paid, they take the collateral - all for free. ...

Larry

I think the Galbraith quote, "the process by which money is created is so simple it repels the mind," can properly be invoked here. You are clearly very well read on this - way ahead of me - but I think you're getting caught up in semantics and all sorts of details and technicalities, to the detriment of the basic concept of how credit money works. 

Although I'm sure this is well known to you, it may be worth revisiting the core concept - all money is debt. One man's monetary asset is another man's liability. Again as you know, most of our money is created this way. But it is an inherently flexible and impermanent process, such that in the purely theoretical event that everyone repaid all of their debt, there would be no money! But in the real world, it's a dynamic process, with money both being created and extinguished all the time.  And so while you're right, the banks do "create money that did not exist before," they do not create it out of thin air as I erroneously said earlier. They create it out of debt. And so Eric is completely right when he says the banks can't lend money they don't "have." Every time money is created from debt there must be an equivalent countervailing asset somewhere. Again - "one man's asset is another man's liability." That's the only way it ever works (excepting Fed thin-air money, of course)

Rather than get bogged down with the details and technicalities of where the bank's reserves actually come from or where they reside, suffice it to say, an asset must exist somewhere as the basis of the bank's loan. So referring back to the example we've all been using, when a depositor deposits $1,000 in the bank (a loan to the bank) and the bank then loans $900 of it to a borrower, the bank does in fact "have" the depositor's money to loan. Otherwise it cannot legally make the loan (creating new money in the process). What the bank no longer "has," though is all of the depositors money. It only "has" 10% of it now. That's the subterfuge. The bank counts on one of two things. Either the borrower pays back the loan before the depositor wants his money back, or sufficient funds are available elsewhere to cover the difference - which of course, under usual circumstances, with many depositors, is normally the case.

But it's important to remember, no matter how much money is created from a given loan, including the multiplier effect, and no matter how fraudulent the process may seem, the only benefit to the bank - and it's a very, very BIG "only!" - is the interest. Because if and when the loans are all paid back, the bank ends up with the same amount of money it started with - just greatly enriched by the interest generated. So Chris is exactly right (as he usually is!) when he says the banks "make their living by borrowing at one rate and loaning at a higher rate." And what a living it is!

Doug wrote:

... I believe what Chris is saying is that a deposit of $1,000 is made to a bank.  That bank can then loan out $900.  The creation of money comes from the multiplier effect of that money then being deposited into a bank that then loans out $810, etc.  After two generations a $1,000 dollar deposit now becomes $1,710 of real money that the lendees can take out and spend on goods and services.  At least that's what makes sense to my linear brain. ...

Doug

To be sure, I'm coming from what Eric calls "weak knowledge," but I think you have this right now.

Greg

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Re: CC-7 inaccurate banking explanation

Yes. Thin air.

Again from Ellen Brown:

The court rejected the bank's claim for foreclosure, and the defendant kept his house. To Daly, the implications were enormous. If bankers were indeed extending credit without consideration – without backing their loans with money they actually had in their vaults and were entitled to lend – a decision declaring their loans void could topple the power base of the world. He wrote in a local news article:

This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property, and all U.S. and State bonds held by the Federal Reserve, National and State banks to be null and void. This amounts to an emancipation of this Nation from personal, national and state debt purportedly owed to this banking system. Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the question of freedom or slavery.

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Re: CC-7 inaccurate banking explanation

Of course, if we are not going to get stuck with a fixed amount of money at some point, the fraction that is 'reserved' will have to be progressively reduced. This is what happened and of course meant that banks were balancing on a knife-edge of solvency.

Until I read the comments above, I had never heard of Ellen Brown. I have ordered Ellen Brown's book, as it says it suggests a sustainable money system. Should be interesting reading.

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Re: CC-7 inaccurate banking explanation

Greg wrote:

They [banks] create it out of debt...So Chris is exactly right (as he usually is!) when he says the banks "make their living by borrowing at one rate and loaning at a higher rate."

Hello Greg, I have provided many links and statements that are contrary to this opinion.  They do not borrow the money they lend and they do not pay interest on the money they lend.  They hold a monopoly to monetize the debt of others for virtually free and then enjoy the benefits of that newly created money by collecting interest and/or collateral.  And to add insult, they are free to create money for their own account to invest as they please.

This is not my opinion, but rather the way it is explained in Federal Reserve publications and Congressional reports.  I have provided a lot of references and so far, I don't think anyone has refuted any.

Tycer wrote:

Yes. Thin air.  Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the question of freedom or slavery.

True words indeed.  In a letter to Thomas Jefferson, John Adams said "All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation."

The biggest problem threatening civilization is our money system which is nothing more than a gigantic Ponzi scheme.  Until people figure that out, there really is little hope to avoid the apocalypse coming our way.

BTW, I'm a big fan of Ellen Brown and think her book "The Web of Debt" - EXPLODING THE MYTHS ABOUT MONEY is one of the most important books of our time.

Larry

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Re: CC-7 inaccurate banking explanation

Hi Larry,

As I mentioned earlier, I don't understand why the banks are particularly concerned about people defaulting on loans if the money is created from thin air. How do defaults manage to bring down banks if the money lent never really existed in the first place?

Regards

James

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Re: CC-7 inaccurate banking explanation

Dear Mr. james_knight_chaucer,

The reason banks get into trouble is because some banks (not certain big boys at the top) have to take a loss on their books when the principle part of the loan is not repaid.

Byron Dale covered this in the last seminar we did.  You may find it of interest.

 Part 1

I'll have to appoligize for the horrible audio at first.  I had a problem with my equipment that I've never had before and will never have again.  I hope this can help answer your question.

GregSchleich's picture
GregSchleich
Status: Silver Member (Offline)
Joined: Jan 16 2009
Posts: 187
Re: CC-7 inaccurate banking explanation

DrKrbyLuv wrote:

Greg wrote:

They [banks] create it out of debt...So Chris is exactly right (as he usually is!) when he says the banks "make their living by borrowing at one rate and loaning at a higher rate."

Hello Greg, I have provided many links and statements that are contrary to this opinion.  They do not borrow the money they lend and they do not pay interest on the money they lend.  They hold a monopoly to monetize the debt of others for virtually free and then enjoy the benefits of that newly created money by collecting interest and/or collateral.  And to add insult, they are free to create money for their own account to invest as they please.

This is not my opinion, but rather the way it is explained in Federal Reserve publications and Congressional reports.  I have provided a lot of references and so far, I don't think anyone has refuted any.

Hi Larry

I'm really glad, more often than not, we're in agreement. Because you're a tough son-of-a-gun to argue with! Wink

I think the reason no one has refuted any of your references (links and statements) is because they don't need to be "refuted." Evidently they need to be reconciled though. Because contrary to how it may appear, I'm not aware that any of them are actually at odds with the CC-7. What concerns me, is that if we're at all in the dark about how money works, we risk  becoming like the blind men describing the elephant. No one is actually wrong, per se, but we could end up with a very distorted picture of what the real beast actually looks like.

At this point the amount of stuff you've put up is a bit overwhelming. You are tough to keep up with! But perhaps you could pull out a few key references (2 or 3, preferably) that you find to be contrary to CC-7 and I'll do my best to try to reconcile them. Or maybe Eric or someone else more qualified would care to jump back in.

Greg

PS: I've got a lot of work I really need to get done, if I'm a tad slow getting back.

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1232
Re: CC-7 inaccurate banking explanation

DrKrbyLuv wrote:

Greg wrote:

They [banks] create it out of debt...So Chris is exactly right (as he usually is!) when he says the banks "make their living by borrowing at one rate and loaning at a higher rate."

Hello Greg, I have provided many links and statements that are contrary to this opinion. 

No you haven't. You've posted numerous statements from Fed publications that corroborate this opinion, yet you have consistently failed to interpret them correctly despite the numerous efforts of others to explain them to you.

Larry wrote:

They do not borrow the money they lend and they do not pay interest on the money they lend.  They hold a monopoly to monetize the debt of others for virtually free and then enjoy the benefits of that newly created money by collecting interest and/or collateral.  And to add insult, they are free to create money for their own account to invest as they please.

Larry, I'm sorry, but you're dead wrong on all points. The quotes you have provided from Fed publications do not confirm your statements here.

Larry wrote:

This is not my opinion, but rather the way it is explained in Federal Reserve publications and Congressional reports.  I have provided a lot of references and so far, I don't think anyone has refuted any.

That's because (as another respondent already said), they don't need to be refuted. These statements are consistent with CC-7 and inconsistent with your own incorrect statements. It's that simple.

Larry, if you want to understand Fractional Reserve Banking, go watch CC-7 again then read this thread AGAIN. All the information is here, all the statements you have quoted are consistent with it, and you're the one who is failing to make the connections.

The one place where there is room for interpretation is the matter of what does or doesn't constitute creating money "out of thin air", which is obviously a subjective statement. Commercial banks create money by loaning deposits out to borrowers, so that the original depositor still has "money on deposit", then the borrower can deposit the borrowed money and there is now 190% as much money "on deposit" as there was to begin with. In my opinion that does not constitute money creation "out of thin air", because unlike the Fed's ability to print, the money has to come from somewhere (deposits) in order to be lent out. But it would certainly be reasonable for one to argue that if all that's needed for the bank to create money is to make an accounting entry and obtain a signed promissory note, that's "thin air". You say tomAHto, I say toMAYto. Whatever...

All the best,

Erik

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 125
Re: CC-7 inaccurate banking explanation

Hi Larry,

Thanks to Thomas Hedin, who provided the video link which I have watched, I am now able to say that you are both correct. Strange eh?

In traditional fractional reserve banking, each bank loans out 90% of its deposits, then that 90% is paid into another bank, they lend out 90% of that, and so on. The banks' profit comes from the different interest rates between savings accounts and mortgage accounts.

What central banks do is cut out all the too'ing and fro'ing. If a bank has $1000 in reserves, they are allowed to lend out $10,000. If you think of it, this has the same net result as traditional banking, after an infinite number of loans and deposits.

Now I am sure you are going to say that means they are printing money. No, not really. Any defaulted loans have to be written off the individual banks' profits. (This has the same net result as if the banks were lending the money traditionally out of deposits.)

Now of course the problem as I mentioned previously is that the country ends up with a fixed amount of money. The only way to increase it, (short of central bank money printing)  is for reserve ratios to be cut, so for every $1000 dollars in reserves the banks are allowed to lend out more than $10,000. This is fine until you get a lot of foreclosures. Each bank loses from its profits the money they lent to each defaulter. This is what causes bank failures.

James

Thomas Hedin's picture
Thomas Hedin
Status: Platinum Member (Offline)
Joined: Jan 28 2009
Posts: 815
Re: CC-7 inaccurate banking explanation

James,

Have you ever had your bank draw down on your deposit with the bank and loan it out to someone else?

OR they are not loaning out the deposits but are mearly creating brand new money each time they make a loan.

If both things cannot be true, one of them is not.

Here is a two part series on how 'money' is created and destroyed in our system.

 part 1

 part 2

This is all the banks do is give us some numbers in a checking account for the collateral we provide.  They never loan us anything, and they don't have anything to pay us with.  It's a complete scam.

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